Canada Mortgage Rules
The Canada mortgage and housing industry had been growing exponentially for the past few years. This was basically a result of the high levels of economic growth. The number of immigrants that were coming into the country had also helped the Canadian mortgage and housing sector to grow further.
But there is always a high possibility that such an exponential rate of growth in a particular sector of the economy can cause. The basic problem that was identified in the Canada mortgage and housing sector was that people had taken up mortgage rates higher than they could afford. This factor even put a lot of pressure on the financial aspects of the economy.
It is a known fact that purchasing a house is a tedious task. In Canada this task is sometimes even nerve-raking. The decision requires a lot of time and attention as the mortgage rates take away a large chunk of the monthly expense budget. But once the house has been selected and the buying decision has been made, there comes the biggest hurdle. To get approved for a mortgage is another pain-staking task. This task has become even more of problem with the revised strictness that comes with the new rules that were introduced by the government in 2010.
The First Rule of Qualification
As per the new Canada mortgage rules introduced on 19th April 2010 anyone who applies for a mortgage has to meet the criteria for a five year fixed mortgage rate. This means that even if someone chooses the option of a variable mortgage rate or a shorter term. This means that even if someone has chosen to go for lower introductory rates or shorter initial terms, they will still be judged on the basis of their eligibility for the five year fixed mortgage rates. This does allow the government to be able to control the burden that comes onto the economy because of the Canada mortgage rates. But at the same time it makes life more difficult for the individual who is looking to buy a house in Canada. The Canadian mortgage and housing industry is now highly dependent on these stricter rules and hence, trying to adapt itself accordingly.
The Maximum GDS Ratio
The Gross Debt Service Ratio refers to all the monthly expenses that are related to an individual’s housing. These expenses include the mortgage payment. This payment includes the principle amount as well as the interest charges. Other expenses like taxes and maintenance are also included in the monthly housing cost in order to calculate the GDS ratio. The GDS ratio is calculated by dividing the monthly housing costs by the gross monthly income. The ratio should not be more than 32%.
The Maximum TDS Ratio
The new Canadian mortgage rules now not only incorporate the housing expenses but also the total debt per month. The Total Debt Service Ratio includes the other monthly debt payments like car loans and credit card payments that need to be made by an individual. The TDS ratio is calculated by dividing the total debt load by the gross monthly income of the individual. This ratio should not exceed 40% in order for the person to qualify for a mortgage. This way the government ensures that the individual does not exceed the monthly budget in any way and therefore, this measure avoids the chances of default to a greater extent.
The Down Payments
The down payment as per the Canada mortgage rules has to be at least five percent of the total price of the house. There is also the option available to buyers which allow them and their spouses to draw $25,000 each under the Home Buyer’s Plan. This plan is issued by the Canada Revenue Agency and is a tax-free account for buyers looking for their first home. The Agency also issues a comprehensive to the plan. This plan ensures that individuals looking to buy houses do not end up buying a house that they cannot afford to pay for.
The Canada mortgage rules also suggest that if the down payment is less than 20% of the purchase price, the mortgage is considered to be a high-ratio mortgage. This means that it will have to be backed by mortgage loan insurance. The fee that has to be paid on the loan insurance is a percentage of the loan amount. This is added to the loan amount to calculate the monthly payment. This way the individual does not pay the premium on hand. Rather the premium is financed along the purchase of the house.
The Amortization Period
The typical amortization period amounts to 25 years. This can be extended up to 35 years too. But the extension requires an increase in the premium that is to be paid on the loan insurance. The percentage increase is also highlighted according to the extension period by the new Canada mortgage rules.
As a result of the new rules introduced by the government, the Canada mortgage and housing sector activities slowed down. But this slowing down effect was created for a short time span. This was because once the new rules were introduced; the market had to adapt itself to these rules. With the recession that also hit the Canadian economy the mortgage and housing sector did get affected as well. But again the basic reason why the Canada mortgage market had trouble was the affordability factor. People who had taken up mortgages they could not afford were seen to suffer the most. Therefore, the new Canada mortgage rules would now help ensure that such situations do not arise in future as they cause a huge economic downturn.
Many people did criticize the government for taking such drastic measures. However, the government believes that these measures had become a necessity and if they would have not been taken there could have been more economic instability caused. The new rules have in fact been developed in order to benefit the home owners.